Question

Plymouth Corp. sells units for $100 each. Variable costs are $75 per unit, and fixed costs are $200,000. If Plymouth leases a new machine, fixed costs will increase by $60,000 a year, but production will be more efficient, saving $5 per unit. At what level of production will Plymouth be indifferent between leasing and not leasing the new machine?

Answer 1

Answer:

12,000 units

Explanation:

The computation of the level of production is shown below:

Since the variable cost is reduced by $5 so new variable cost is $70 so there is an margin of $5

And, there is an increase in fixed cost i.e $60,000

So, the level of production is

= An increase in fixed cost ÷  Margin per unit

= $60,000 ÷ $5

= 12,000 units